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Learn About Different Types of Turnover Ratios

Turnover means the number of times assets converted into sales. It is the rate at which assets are turned over. Turnover ratios assess a company’s ability to manage its liabilities using its assets efficiently. It is expressed in integers rather than percentage or proportion. Turnover ratios are often termed as Efficiency Ratio or Activity ratio or Performance Ratio. Ability to manage the assets and generate revenues depends on these ratios.

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Turnover ratio is measured by dividing company’s revenue by its total assets

Types of Turnover Ratios

  1. Inventory Ratio or Stock Turnover Ratio
  2. Debtors Turnover Ratio
  3. Creditor’s Turnover Ratio
  4. Working Capital Turnover Ratio
  5. Average Collection Period
  6. Total Assets Turnover Ratio
  7. Fixed Assets Turnover Ratio
  8. Capital Employed Turnover Ratio
  1. Inventory Ratio or Stock Turnover Ratio:

It is also known as stock turnover ratio.It assesses a company’s ability to handle its inventory properly. It is measured by dividing its cost of goods sold by its average inventory. It shows the relationship between average inventory and good sold. It is a measure for how frequently a company’s inventory turned into sales. It is used to to calculate the investment in stock in trade is utilized affectively or not. It reveals the affiliation between costs of goods sold/average inventory and sales at cost price or selling price.

Inventory Ratio: Cost of goods sold / Average stock

Or,

Stock Turnover Ratio = Cost of goods sold / Average inventory at cost

It will be justified to measure turnover in order to prevent needless investment in inventories. Stock turnover can be defined by the following formula:

Stock turnover = Cost of material consumed during that period/ Average stock of material held during the period

There are four types of stock:

  1. Fast moving stock :

These are materials in demand.

  1. Slow moving stock:

These are materials with low turnover ratio.

  1. Dormant stock

These are materials without demand.

  1. Obsolete stock

These are materials that are no longer in demand.

Steps to minimise losses on account of obsolete stock

  1. Stock holding of items may be counted in terms of number of days of consumption. There should be a particular system to dispose such goods.
  2. A proper information system should be introduced in the organisation in order to locate items on account of changes in the method of production, or substitution by a cheaper material.
  3. Periodic reports should be made highlighting the position of items with quantity of opening stocks, issues purchases and closing stock.
  4. It should be counted by the store department to locate dormant stocks and slow moving stocks.
  5. Debtors Turnover Ratio:

Debtor’s turnover is also known as receivable ratio. It establishes the relationship between average debtors and net credit sales.It is complementary to Debtor turnover ratio. It represents average debt collection period.It shows how credit sales converted into cash. The ratio indicates the extent to which the debt has been changed into cash and the efficiency of the debt collection period.

Debtors Turnover Ratio = Net credit sales / Average account receivables

It is equivalent to debt collection period ratio.

Debt collection period ratio denotes average debt collection period. It focuses the ability of the debt collection period and the immensity to which the debt have been converted into cash. It plays a vital role in the management.

Debt collection period ratio = Receivable days in a year / Net credit sales for the year

  1. Creditor’s Turnover Ratio or Payable Turnover Ratio:

It is also termed as payable turnover ratio. The credit purchases are the amounts of buying companies to Account Payable as Creditors. Account Payable is also termed as Trade Creditors. Account Payable comprises of bills payable and sundry creditors.  This ratio confirms the relationship between the average trade creditors and net credit purchases.

Creditor’s Turnover Ratio or Payable Turnover Ratio = Net credit purchases / Average accounts payable

  1. Working Capital Turnover Ratio:

It indicates the effective employment of working capital applicable to sales. This ratio shows the firm’s liquidity position. It introduces relationship between networking capital and cost of sales.

Working Capital Turnover Ratio = Net sale / Working capital

  1. Average Collection Period:

It is also termed as average age of debtors and receivables or debt collection period. It specifies the time period it takes to realize the credit sales or debtors and receivables. It also calculates the average credit period benefitted by the customers.

Average Collection Period = Days on a year / Debtor’s turnover ratio

Or,

Average Collection Period = (Average debtors / Credit sales) Days in a year

  1. Total Assets Turnover Ratio:

It indicates the relationship between sales and total assets. It specifies how well a firm’s total assets are being utilized to generate sales.

Total Assets Turnover Ratio = Net Sales / Total Assets

  1. Fixed Assets Turnover Ratio:

It is also termed as the ratio of sales to fixed assets. It indicates how effectively the fixed assets are utilized. It estimates the efficacy with which the firm has been utilizing its fixed assets in order to generate sales. The ratio forms connection between total fixed assets and cost of goods sold. When the ratio is depressed, it demonstrates underutilization of fixed assets.

Fixed Assets Turnover Ratio = Sales / Net fixed assets

Or,

Fixed Assets Turnover Ratio = Cost of goods sold / Total fixed assets

  1. Capital Employed Turnover Ratio:

It measures the efficacy of company’s capital utilization. It establishes the connection between capital employed and amount of sales.

Capital Employed Turnover Ratio = Sales / Capital employed

Or,

Capital Turnover Ratio = Cost of goods sold / Total fixed assets

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